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Tata Motors: JLR ups the ante

May 27, 2011

Tata Motors announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company's consolidated revenues grew by 23% YoY during the quarter, while profits rise by 273% YoY. Here is our analysis of the results.

Performance summary

Consolidated revenues rise by 33% YoY during the year as growth is led by both the standalone and Jaguar Land Rover businesses.

Revenues of Tata (and other brands; including spares and financing) increased by 30% YoY during the year, while JLR's revenues grow by 42% YoY (not adjusted for intersegment revenues).

Operating profits grow by a healthy 107% YoY during the year as margins expand by 4.9% YoY to 13.7% largely led by a significant ramp up in margins of the JLR business.

Consolidated profits rise by 220% YoY during the year (excluding extraordinary items) led by a strong operating performance and lower interest costs.

Consolidated financial performance

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Sales

293,665

361,782

23.2%

925,193

1,231,333

33.1%

Expenditure

258,482

311,387

20.5%

844,033

1,063,158

26.0%

Operating profit (EBDITA)

35,183

50,395

43.2%

81,160

168,175

107.2%

Operating profit margin (%)

12.0%

13.9%

8.8%

13.7%

Other income

6,778

(5,420)

17,931

896

-95.0%

Interest (net)

5,514

4,532

-17.8%

22,397

20,454

-8.7%

Depreciation

8,878

13,104

47.6%

38,871

46,555

19.8%

Exceptional items

(1,410)

1,774

(2,596)

2,310

Profit before tax

26,160

29,113

11.3%

35,226

104,372

196.3%

Tax

4,092

2,884

-29.5%

10,058

12,164

20.9%

Share of profit in associates

452

348

-23.0%

845

1,014

19.9%

Minority interest

(241)

(202)

(303)

(485)

Profit after tax/(loss)

22,278

26,375

18.4%

25,711

92,736

260.7%

Net profit margin (%)

7.6%

7.3%

2.8%

7.5%

No. of shares (m)

637.7

Diluted earnings per share (Rs)*

141.8

P/E ratio (x)*

7.7

*Adjusted for exceptional items

What has driven performance during FY11?

Tata Motors' consolidated revenues increased by 33% YoY during year. The revenue growth was led by the standalone business (up 30% YoY) as well as the Jaguar Land Rover (JLR) business (up 42% YoY). The company's standalone business was driven by the commercial vehicle segment, whose volumes increased by 23% YoY and formed about 55% of the total volumes. Total standalone sales volumes stood at over 836,000 units, while total global volumes stood at over 1,080,000 units for the year. Within the CV space, volumes were driven by the M&HCV segment (27% YoY), while volumes in the LCV segment grew by 20% YoY. Passenger vehicle and utility vehicle volumes (including JLR vehicles) in the domestic market also increased by 23% YoY during the year with sales of the Nano crossing the 100,000 mark. There was a strong 70% YoY increase in exports during the quarter as well, led by higher CV volumes. Tata Motors' market share in the commercial vehicle space stood at 61.8% while that in passenger vehicles was 13% during the year. Realisations also improved as the company took cumulative price increases of 5.3% and 4.6% on commercial vehicles and passenger cars respectively during the year.

As for the JLR business, the revenue surge was led by both higher volumes coupled with better realisations as the product mix changed in favour of the company. Improved market conditions, better market mix with strong growth in China, continued strong response to product launches and favourable exchange rates all did their bit in bolstering performance. This also led to a better than expected performance at the operating level as the company's EBIDTA margins stood in the region of 11% during the year. In terms of wholesale volumes, total JLR sales were up by 26% YoY. Land Rover volumes were up by 30% YoY during the year, while that of Jaguar were up 12% YoY.

Tata Motors' consolidated operating profits increased by a strong pace of 107% YoY as operating margins expanded to 13.7% as compared to 8.8% during FY10. As seen from the table displayed above, the performance at the PBIT level was driven by the improvement in the operating performance of JLR. On an overall basis, the company was able to keep the input cost component (the main cost head) under control, which helped it improve its margins. While the standalone business' profitability was under pressure this year (on the back of rising input costs), JLR's performance was driven by higher sales volumes as well as better realisations. The company's senior management also stated that raw material prices were hurting margins. However, the company had upped prices during the year which helped in softening the pressure from high input costs to some extent.
JLR's PBIT margins came in at about 11% as compared to nil last year. On the other hand, the standalone business' PBIT margins declined to about 8% in FY11 from 9% last year.

Cost breakup...

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Raw materials

187,647

232,692

24.0%

614,954

790,084

28.5%

% of sales

63.9%

64.3%

66.5%

64.2%

Staff cost

21,354

24,930

16.7%

87,518

93,427

6.8%

% of sales

7.3%

6.9%

9.5%

7.6%

Product development expenses

2,337

3,486

49.2%

4,982

9,625

93.2%

% of sales

0.8%

1.0%

0.5%

0.8%

Other expenditure*

47,145

50,278

6.6%

136,579

170,023

24.5%

% of sales

16.1%

13.9%

14.8%

13.8%

Total

258,482

311,387

20.5%

844,033

1,063,158

26.0%

*Including amount capitalised

Tata Motors’ consolidated net profits increased by 220% YoY (excluding extraordinary items) during FY11. Growth was largely led by a strong operating performance and lower interest costs. Relatively benign increase depreciation charges also played its part in boosting profits.

What to expect?

At the current price of Rs 1,089, the stock is trading at a multiple of 8.1 times its trailing twelve month consolidated earnings per share. Going forward, Tata Motors intends to focus on improving its product portfolio and customer service in an environment where competitive pressures have increased. The focus will also be on reducing costs. Having said that, factors such as rising input costs, interest rates, fuel costs will likely add pressure to the auto industry’s growth in the medium term and Tata Motors will not be immune from the same. Entering into new long term raw material contracts will play a key role on the company’s profitability going forward.

As for JLR's performance, it continues to remain robust on the back of strong demand for the new launches from various geographies. Notwithstanding its current performance, we however stick to our view of JLR being cyclical in nature and also a capital intensive one and thus believe that viewing it on the basis of just its recent financials should be avoided.

The company’s sales growth has come in higher than we had estimated and we shall have to upgrade out number for the year accordingly. However, keeping the abovementioned factors in mind, we maintain a cautious view on the stock at these levels.

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